Credit: ShutterstockColombia Needs Larger Stimulus to Revamp Economy After COVID-19
April 17, 2020Real Estate
Colombia was one of the fastests acting Latin American countries as COVID-19 started to spread throughout the region. Fourteen days after the first COVID-19 case, the country entered in an obligatory quarantine. Nevertheless, the virus has spread throughout the country and both cases and deaths have increased. The quarantine is to be lifted on April 27, but what will be the impact of this quarantine on the Colombian economy? Juan Pablo Espinosa, Chief Economist and Head of Economic, Industry and Market Research of Bancolombia gave GRI Club Members a view of how the country's economic condition and how it could be impacted by this crisis.
Main Takeaways
This crisis is a clash of three factors: drop in oil prices, COVID-19 pandemic and the current financial condition of each country. These factors together are having a deep impact on the global economy. This is one of the most difficult economic crises Colombia has ever faced and there will be not one company, government entity, home, or sector that will not feel the impact of this crisis.
Primary effects are already being felt due to the halting of all economic activities. But there will also be secondary effects such as closing companies and a loss of jobs will impact the country’s productive tissue and leave a mark in its financial sector. Government authorities are facing a difficult challenge with having to create and implement the right measures to flatten the COVID-19 curve, while at the same time having to keep economic activity. This is a very difficult and delicate balancing act.
Espinosa explained that the level of deterioration of financial conditions is at 160 percent, a little more than the Latin American level. A few weeks ago it was over 190, and it has been corrected. Risk premium levels and reference rates curve , the exchange rate, and stock prices are now at very different levels, and have increased financing costs for the entire economy. The amount of capital flight experienced in the last weeks is unprecedented in the history of the last decade of emerging economies.
The quarantine has impacted drastically the demand for fuel throughout the world. This drop was so dramatic that the offer needed to adjust to the new reality, nevertheless prices could not adjust as rapidly as the demand fell. This caused an accumulation of inventory globally. This is also unprecedented in the modern history of the oil and gas market. The prices of crude could linger at least half of what it was in the beginning of 2020.
Colombia’s COVID-19 Measures
Colombia is currently experiencing a clash between the economic curve and the pandemic curve. The silver lining is that the precautions the government placed has helped lower the curve and the number of COVID-19 cases in the country. Colombia has adopted all of the OECD recommendations to confront the COVID-19 crisis. Espinosa shared that the Colombian government’s response has been well covered, nevertheless it will need to have a larger fiscal response to reduce the economic recession curve.
This pandemic has created a high level of uncertainty and the science is not available to predict how long it will last and what it affects will be. It is difficult for anybody to predict how long the quarantines need to be put in place and how long the economy will be halted as a result. Experts predict that it will have an impact on the 2Q-3Q20 of -1 percent of the GDP and in the worst case scenario, 6.5 percent of the GDP. Economists are calculating new scenarios with new factors every week to see how the economy is reacting, and if we will see a U or a V shaped recuperation.
How has COVID-19 Impacted Colombia’s Financial Capacity?
To increase the provision of liquidity, the financial system deployed significant support measures for all credit products. Banks are also exploring alternatives for businesses, and are freezing or deferring certain quotas depending on the cash flow of each bank. With Colombia’s available resources that exist today, the financial system’s liquidity is positive. What may happen is that if they are limited further, the authorities will have to contribute more to the measures taken by the Bank of the Republic. What is required is a much more permanent supply of resources. The decisions now have been seen to be adequate and successful in attacking different points of the problem.
The key is to see bigger fiscal packages from the government. Members discussed that Colombia has significant fiscal narrowness, and that it is not that they do not want to spend, but that there are limited sources. Some members believe that Colombia could be in quarantine until the end of June, but they are worried as to how the economy will fend so much time in a near-total quarantine.
According to the experts, in the worst case scenario, Colombia would be quarantined until the end of May with a gradual normalization of activities. Any extension from here on will have to be accompanied by a very large monetary policy and compensation mechanism in the sense that the deficient economy and the society will hardly be able to endure a longer time.
Fear of Social Angst
Another worry members discussed was the possibility of a social revolution due to the crisis, loss of employment and financial difficulties, but it is even more difficult to predict a response such as this. Taking experience from other countries that started to be impacted by the crisis earlier and the sizes of their stimulus packages, this will play an important role in avoiding social angst.
Members asked what would be a good stimulus package for Colombia to avoid social disagreement. Experts discussed that to have an overall idea of this package, it would have to be triple the size of the one that has been released. The current stimulus package represents roughly 2 percent of Colombia’s GDP, but members consider it should be at 4-5 percent of the GDP to help effectively mitigate the economic risks. This would provide support to not only homes, but also SMEs, which are running low on resources. The stimulus package should provide liquidity to help SMEs cover payroll and certain fixed costs. To support this segment of the economy, the size of the package would rise to 6 percent of the GDP.
The government has yet to explore asking for more financial assistance. The current stress of the financial market has made it so that investors will not be willing to provide those resources. The government may need to reach out to multilateral entities for support and analyze if it is viable to use the IMF support line or not. It could be a mechanism, but it is not easy because that line was not thought of in the context of this crisis the world is living in.
Learning from China and other Countries
Member’s are looking abroad for answers as to how the economy will react to this crisis. For instance, China has been showing good recovery signs in the last weeks. The Chinese market is slowly starting to go back to normal, and the fact that people are tired of being home will kickstart economic activity. Restaurants were the first to start recovering and then the retail sector. In the last week, many Chinese consumers have been purchasing luxury goods as a present for overcoming the crisis. Although China is showing good signs, members feel that other markets must also be analyzed.
Members discussed that the loss of jobs and economic performance will depend on each government’s stance and measures implemented to tackle the crisis. The retail could see a slower recovery after quarantine is lifted, probably a 60 percent increase after the 2Q or 3Q since its reopening. Members also shared that most of the market will be on hold for the next 30-60 days and many of their clients are reporting losses and are asking to push rent payments. Many landlords are looking to extend contracts and find a way to help their tenants, but it is difficult to do so.
Main Takeaways
- Colombia could be in quarantine until May and the impact on the economy will increase the longer it is halted.
- The Colombian government has taken the right measures to help lower the curve of COVID-19 cases, nevertheless it may need a stronger fiscal package to lower the impact it will have on the economy.
- Members are worried of social angst rising from financial instability and the virus. A stronger fiscal package could help relieve the informal sector, SMEs and the vulnerable population.
This crisis is a clash of three factors: drop in oil prices, COVID-19 pandemic and the current financial condition of each country. These factors together are having a deep impact on the global economy. This is one of the most difficult economic crises Colombia has ever faced and there will be not one company, government entity, home, or sector that will not feel the impact of this crisis.
Primary effects are already being felt due to the halting of all economic activities. But there will also be secondary effects such as closing companies and a loss of jobs will impact the country’s productive tissue and leave a mark in its financial sector. Government authorities are facing a difficult challenge with having to create and implement the right measures to flatten the COVID-19 curve, while at the same time having to keep economic activity. This is a very difficult and delicate balancing act.
Espinosa explained that the level of deterioration of financial conditions is at 160 percent, a little more than the Latin American level. A few weeks ago it was over 190, and it has been corrected. Risk premium levels and reference rates curve , the exchange rate, and stock prices are now at very different levels, and have increased financing costs for the entire economy. The amount of capital flight experienced in the last weeks is unprecedented in the history of the last decade of emerging economies.
The quarantine has impacted drastically the demand for fuel throughout the world. This drop was so dramatic that the offer needed to adjust to the new reality, nevertheless prices could not adjust as rapidly as the demand fell. This caused an accumulation of inventory globally. This is also unprecedented in the modern history of the oil and gas market. The prices of crude could linger at least half of what it was in the beginning of 2020.
Colombia’s COVID-19 Measures
Colombia is currently experiencing a clash between the economic curve and the pandemic curve. The silver lining is that the precautions the government placed has helped lower the curve and the number of COVID-19 cases in the country. Colombia has adopted all of the OECD recommendations to confront the COVID-19 crisis. Espinosa shared that the Colombian government’s response has been well covered, nevertheless it will need to have a larger fiscal response to reduce the economic recession curve.
This pandemic has created a high level of uncertainty and the science is not available to predict how long it will last and what it affects will be. It is difficult for anybody to predict how long the quarantines need to be put in place and how long the economy will be halted as a result. Experts predict that it will have an impact on the 2Q-3Q20 of -1 percent of the GDP and in the worst case scenario, 6.5 percent of the GDP. Economists are calculating new scenarios with new factors every week to see how the economy is reacting, and if we will see a U or a V shaped recuperation.
How has COVID-19 Impacted Colombia’s Financial Capacity?
To increase the provision of liquidity, the financial system deployed significant support measures for all credit products. Banks are also exploring alternatives for businesses, and are freezing or deferring certain quotas depending on the cash flow of each bank. With Colombia’s available resources that exist today, the financial system’s liquidity is positive. What may happen is that if they are limited further, the authorities will have to contribute more to the measures taken by the Bank of the Republic. What is required is a much more permanent supply of resources. The decisions now have been seen to be adequate and successful in attacking different points of the problem.
The key is to see bigger fiscal packages from the government. Members discussed that Colombia has significant fiscal narrowness, and that it is not that they do not want to spend, but that there are limited sources. Some members believe that Colombia could be in quarantine until the end of June, but they are worried as to how the economy will fend so much time in a near-total quarantine.
According to the experts, in the worst case scenario, Colombia would be quarantined until the end of May with a gradual normalization of activities. Any extension from here on will have to be accompanied by a very large monetary policy and compensation mechanism in the sense that the deficient economy and the society will hardly be able to endure a longer time.
Fear of Social Angst
Another worry members discussed was the possibility of a social revolution due to the crisis, loss of employment and financial difficulties, but it is even more difficult to predict a response such as this. Taking experience from other countries that started to be impacted by the crisis earlier and the sizes of their stimulus packages, this will play an important role in avoiding social angst.
Members asked what would be a good stimulus package for Colombia to avoid social disagreement. Experts discussed that to have an overall idea of this package, it would have to be triple the size of the one that has been released. The current stimulus package represents roughly 2 percent of Colombia’s GDP, but members consider it should be at 4-5 percent of the GDP to help effectively mitigate the economic risks. This would provide support to not only homes, but also SMEs, which are running low on resources. The stimulus package should provide liquidity to help SMEs cover payroll and certain fixed costs. To support this segment of the economy, the size of the package would rise to 6 percent of the GDP.
The government has yet to explore asking for more financial assistance. The current stress of the financial market has made it so that investors will not be willing to provide those resources. The government may need to reach out to multilateral entities for support and analyze if it is viable to use the IMF support line or not. It could be a mechanism, but it is not easy because that line was not thought of in the context of this crisis the world is living in.
Learning from China and other Countries
Member’s are looking abroad for answers as to how the economy will react to this crisis. For instance, China has been showing good recovery signs in the last weeks. The Chinese market is slowly starting to go back to normal, and the fact that people are tired of being home will kickstart economic activity. Restaurants were the first to start recovering and then the retail sector. In the last week, many Chinese consumers have been purchasing luxury goods as a present for overcoming the crisis. Although China is showing good signs, members feel that other markets must also be analyzed.
Members discussed that the loss of jobs and economic performance will depend on each government’s stance and measures implemented to tackle the crisis. The retail could see a slower recovery after quarantine is lifted, probably a 60 percent increase after the 2Q or 3Q since its reopening. Members also shared that most of the market will be on hold for the next 30-60 days and many of their clients are reporting losses and are asking to push rent payments. Many landlords are looking to extend contracts and find a way to help their tenants, but it is difficult to do so.